Accounting
Don’t fall into these traps when accounting for stock-based compensation
If you work at a startup company or have startup clients, you know all too well that cash can be tight and hiring and retaining top talent is a challenge.
In response many startups turn to equity compensation to attract and retain top talent without breaking the budget on salaries and benefits. Stock-based compensation also ties employees to the company’s success as they essentially become owners. Employees will theoretically work harder and think twice before leaving if they have a chance to earn a substantial windfall in exchange for taking a below-market starting salary.
Great. But founders and their financial teams must remember that equity compensation is not free — it’s a form of deferred compensation that must be treated as an expense. As such, equity compensation has strict rules and regulations for employers and employees to follow, especially regarding taxes.
Even with substantial financial backing, many private/early-stage companies do not have enough resources to handle complex GAAP accounting and financial reporting for SBC awards. This can be problematic since larger investors or banks typically want a third party to sign off on the accuracy of the startup’s financials. They want assurances that the company is not doing anything fraudulent or failing to follow GAAP guidance. Also, being careless with SBC in your company’s early years can make it very costly and time-consuming to change from non-GAAP to GAAP standards as you prepare for an IPO, sale or other exit.
Setting the table
One of the top requirements is to determine fair market value for the company’s stock through a 409(a) valuation, which is required for tax compliance and necessary before optioning or issuing stocks. Typically, startups will need to undergo the 409(a) valuation once per year and any time after they raise funding. Companies should also provide reasonable guidance to employees about the tax consequences of various types of equity compensation. That’s very important since some employees, particularly young workers, have never received equity compensation before. When restricted stock awards provide ownership interest upon vesting, the 83(b) election allows these awards to be taxed at the grant date based on their FMV — even if they have not fully vested. By making an irrevocable 83(b) election within 30 days of the RSA grant, employees recognize taxable income immediately without waiting for vesting. This strategy can be beneficial if the stock’s value is expected to rise, since it minimizes ordinary income and maximizes capital gains upon sale. However, employees and their advisors should be cautious because taxes paid via this election are non-refundable if the RSA does not vest, or if its value declines. Generally, paying tax upfront is advantageous when the stock’s value is lower.
Five things that founders and financial teams often overlook regarding equity compensation
1. Being too generous: Founders might want to understand various types of share-based payment awards, such as stock options, restricted stock awards, restricted stock units, etc., that best align with the company’s expected growth and strategies. They might unintentionally give out too many shares in employee equity plans without taking into account long-term equity dilution. Without careful planning, founders could inadvertently allow employees to receive more financial benefits than the company planned for in a liquidity event. Also, the founders might not have enough shares to give up in later rounds of financing.
2. Vesting criteria too easy to meet: Share-based payment awards come with various vesting conditions, with a plain vanilla plan being a four-year service vesting requirement without other performance conditions or without taking market conditions into account. Founders and their financial teams may want to provide employees with additional conditions if the vesting conditions are easy to achieve. Otherwise, key employees might leave the company much sooner than expected. I’ve found over my career that the easier the vesting conditions, the less motivation employees tend to have to perform at a high level and attrition rates rise.
3. Vesting criteria too aggressive: Conversely, if the employer wants to make vesting more stringent or restrictive, it can add conditions such as EBITDA targets or IPO/change in control, which are considered performance conditions, or multiple of invested capital, which is a market condition. Stock-based compensation awards serve as incentives. Vesting conditions should be challenging enough to drive employees toward meaningful, but not unrealistic, achievement. If vesting goals are set too high, the awards may lose their motivational effect, working against their primary purpose of aligning employee efforts with company success.
4. Inconsistent record keeping: The executive team sometimes underestimates the amount of effort required to maintain legal documents, the cap table, vesting and exercising schedules. Good recordkeeping is crucial when the company goes through financial statement audits or financial due diligence. Without proper recordkeeping, financial statement audits and due diligence processes can be significantly prolonged. This can trigger higher audit and diligence fees, delays in closing the transaction, and even risking deal termination or substantial penalties (see the cautionary tale below).
5. Tax implications: The founders might overlook potential implications of income taxes and payroll taxes varying depending on the types of awards. Understanding the main differences between incentive stock options and non-qualified stock options is essential when creating equity incentive plans.
Accounting challenges regarding common forms of equity compensation
Startups frequently use equity compensation (e.g., stock options, restricted stock units, etc.), but many fail to grasp its accounting complexities. ASC 718 requires companies to recognize the FMV of these awards as an expense. Complexities arise with performance-based or market-based conditions, which require careful classification and tracking. Accountants must ensure that awards (liability or equity) are properly classified and they must monitor modifications that could lead to additional expenses.
Misclassifying these instruments above can result in misstated financial statements, which is especially problematic during audits or liquidity events (e.g., M&A, IPO). Failing to account properly for embedded derivatives or misclassifying equity and liabilities can lead to noncompliance with GAAP, potential penalties and loss of investor confidence.
Cautionary tale
One of our startup clients initiated their first financial statement audit to prepare for a Series A capital raise. They expected to complete the audit within eight to ten weeks, which is typical for companies with adequate staffing and strong internal controls. However, the audit dragged on for over a year due to significant recordkeeping issues. The company lacked a cap table, despite issuing multiple classes of preferred equity, stock options, restricted stock units, restricted stock awards, convertible debt, SAFEs and warrants. Some equity awards had even been granted without board approval. Reconstructing the cap table required extensive time from the management team, causing substantial delays.
After completing the cap table, the company engaged a third-party consultant to determine the appropriate accounting treatment for these equity instruments under ASC 718, ASC 480 and ASC 815 — a process that took additional weeks. In the tighter capital environment of 2022 to 2024 marked by higher interest rates, the company ultimately failed to secure the necessary working capital to sustain operations. Furthermore, due to poor recordkeeping, the company was required to amend prior-year tax returns, resulting in hefty penalties.
This case underscores the importance of maintaining accurate records and clear internal controls to avoid costly delays and risks during audits and capital-raising efforts.
Equity compensation is one of the most important tools startups have for preserving cash flow and retaining top talent. As a CPA, you play a critical advisory role in ensuring the company accounts for these instruments correctly, reducing the risk of costly restatements and ensuring compliance during future liquidity events. The startup culture runs fast and furious with constant pivots and reiterations. Don’t let proper treatment of equity compensation get lost in all the excitement. That’s where you come in.
President Donald Trump is preparing to take his show on the road after a shock-and-awe flurry of executive actions that have flipped U.S. priorities on everything from climate policy to
Yet while Trump’s long-planned fire and fury start to his second term is entirely something he’s controlled, the next steps for his plans to remake Washington will need the help of others. Republicans, who narrowly control the House and Senate, have yet to find agreement on how to move Trump’s ambitious plans through Congress.
Trump’s third day in office will be capped by an Oval Office interview with Fox News host Sean Hannity, set to air Wednesday night during Asia market hours. Trump is also expected to meet today with a group of centrist House Republicans, according to a Semafor
Trump met Tuesday with House and Senate Republican leaders to chart a path forward on his priorities, but those talks ended without a deal on how to advance Trump’s signature tax plan, as well as on other key policy priorities like immigration and energy.
Senate Republicans would like to do a large bill on immigration and energy first to deliver a quick win for the president and then tackle tax reform in a second bill, whereas House Republicans would prefer to do one large bill that ties together all of Trump’s priorities to help ensure passage through Congress.
Congressional Republicans have struggled with unity in recent years, especially in the House. It took 15 votes for Kevin McCarthy to become speaker in 2023, and he lasted just 10 months in the job before being ousted. GOP lawmakers eventually settled on Mike Johnson to take over, and he’s led an uneasy majority since then. Earlier this month, Johnson required Trump’s own last-minute intervention to flip a couple of votes in order to keep the top job.
Hannity, in a Tuesday evening program at the Capitol with House GOP leaders and lawmakers, repeatedly pressed them to get on board with Trump’s full agenda, urging unanimity while reminding repeatedly that no one member can get everything they want.
Johnson told Hannity Tuesday that a bill to move Trump’s tax agenda, extending cuts from his first term and enacting promises made during his campaign, could be done by April and would be passed by the Memorial Day holiday near the end of May at the latest.
“We’ve had a lot of member briefings, but we’ve also been talking about this with President Trump,” House Majority Leader Steve Scalise told reporters after his meeting with the president on Tuesday.
“When you look at what gives us the best path to success, to secure the border, lower energy costs, save the tax policies, stave off the tax increase — all of those things we want to do, what builds the best path?” Scalise added.”The one area we’re not in disagreement on is what will be in an overall package. We’re all talking about the same things.”
Yet for all the optimistic talk on passing Trump’s legislative agenda, there’s no agreement yet on how to do it.
Complicating matters further, Republicans in recent years needed to rely on Democratic votes for even the most basic legislative must-dos, like funding the government or lifting the debt ceiling. House Republicans can only afford to lose one vote and still be able to pass bills without needing to go to Democrats for help. In the Senate, they can afford just three defections.
“We’re gonna get the job done, at the end of the day,” Representative Tom Emmer, the Minnesota Republican whose job as majority whip is to corral House GOP votes for the bills that will enact Trump’s agenda, told Hannity. “Failure is not an option.”
Fire funding
Meanwhile, preparations are underway for a trip to North Carolina and Los Angeles, the latter of which will give Trump a chance to spar on Democratic turf with the biggest political foil of his first days back in office, California Governor Gavin Newsom.
Trump is
In his inaugural address, Trump said fires have burned in Los Angeles “without even a token of defense.” Newsom shot back that Trump’s rhetoric was both “nonsense” and “insulting,” in a statement late Tuesday that interspersed those words with photos of firefighters tackling the blazes.
“I look forward to President Trump’s visit to Los Angeles and his mobilization of the full weight of the federal government to help our fellow Americans recover and rebuild.”
Newsom has also sparred with conservatives in Congress over whether federal aid to California should come without conditions — his insistence — or with conditions including requiring changes to water policy and fire mitigation strategies in the state, as Republicans including Johnson have suggested.
“We’re going to take care of Los Angeles,” Trump said to reporters on Tuesday at the White House. “I’m going to North Carolina, which has been abandoned by the Democrats. And I’m going to North Carolina, very importantly, first, I’ll be there on Friday.”
Trump will also go to Nevada, a swing-state he won in the 2024 presidential election, to “thank them” for their support.
The trip will cap off a busy week for Trump, who advisers and allies say returned to power with a strong sense of the way he wanted to approach a second term. Trump is trying to demonstrate his effectiveness as a leader and draw a contrast with the former President Joe Biden, who typically did one or two public events each day in office. Many of Trump’s aides would like his legacy to rival that of the late President Ronald Reagan.
The Trump team always intended to move at a dizzying pace during its first two years in office, while Republicans control the White House, Senate and House. They say they are emboldened and confident after winning all seven swing states in the 2024 election and expanding the Republican Party to include greater numbers of young men, Black men and Hispanics.
To reporters, Trump has said he may impose tariffs on Mexico, Canada and China as soon as February 1. “We’re talking about a tariff of 10% on China, based on the fact that they’re sending fentanyl to Mexico and Canada,” Trump told reporters Tuesday afternoon.
Trump’s comments, made in White House events that turned into impromptu press conferences, scrambled currency markets. China’s onshore yuan dropped by the most in three weeks on his tariff threat reiteration. A day earlier, Trump’s 25% threat
Even if Trump’s second-term is off to an impactful start, warning signs loom for his presidency. The nation’s stubborn inflation will be hard to tame, despite his recent order to federal agencies to study the issue of bringing down costs for consumers.
Peace in the Middle East may prove fragile, despite the agreed-upon six week cease fire between Israel and Hamas in Gaza, while Russia continues to bombard Ukraine’s cities nightly, with little sign yet of public movement by Russia’s leadership toward the truce talks Trump says are essential.
Trump indicated he plans to speak soon with Russian President Vladimir Putin, and suggested Tuesday he could impose more sanctions on Russia if Putin doesn’t come to the table for talks on Ukraine.
Putin told China’s leader Xi Jinping, during their 95-minute video call Tuesday, that he was ready for dialogue with the U.S. on Ukraine, Interfax
Carr, Riggs & Ingram, a Top 25 Firm based in Enterprise, Alabama, has added CapinCrouse, a Regional Leader based in Indianapolis, effective Jan. 17, 2025.
The deal is CRI’s biggest merger in its history, and the first since it
CapinCrouse focuses on exclusively serving nonprofits, such as faith-based organizations and private colleges. The merger will add 40 partners, 185 professionals and 15 offices to CRI, which has 437 partners and 2,304 staff
After the outside investment, CRI split its attest and non-attest practices, as is common when accounting firms receive private equity or venture capital funding. Carr, Riggs & Ingram, L.L.C., as an independent licensed CPA firm, is providing assurance, attest and audit services. CRI Advisors, LLC (including its subsidiary entities) operates as a separate legal entity, providing clients with tax and business consulting services.
“This merger represents an exciting milestone in our firm’s history and a significant advancement for both CRI and CapinCrouse,” said CRI Advisors LLC chairman Bill Carr in a statement Tuesday. “We have previously invested in firms that specialize in serving faith-based organizations and private colleges. With the addition of CapinCrouse, CRI is now positioned to become the leading national provider in these vital markets. By combining our strengths, we will enhance the value we offer and greatly expand our national geographical presence. We are proud to welcome CapinCrouse to the CRI family.”
Financial terms of the deal were not disclosed. CRI ranked No. 24 on Accounting Today‘s 2024 list of the Top 100 Firms, with $455.36 million in annual revenue. CapinCrouse ranked No. 27 on Accounting Today‘s Regional Leaders list of the Top Firms in the Great Lakes region, with $35.51 million in annual revenue.
“We are very pleased to join CRI,” said Fran Brown, Managing Partner of CapinCrouse. “For over 50 years, our focus has been on providing innovative service to nonprofit organizations whose outcomes are measured in lives changed. CRI’s commitment to client service, respect, and integrity is an excellent fit with our mission and firm culture. We will continue to operate under the CapinCrouse brand and are excited to now have access to more offerings and resources to further drive exceptional client service.”
Koltin Consulting Group CEO Allan Koltin advised both firms on the merger. “It is interesting to note that this is CRI’s biggest M&A deal in its history, and it comes on the heels of their private equity deal with Centerbridge Partners and Bessemer Venture Partners,” he said in a statement. “CapinCrouse, a top 125 firm nationally, is viewed by many as the preeminent firm in the country when it comes to the audit and related advisory services of nonprofits and religious organizations. My intuition suggests that going forward, we will see CRI expanding its geographic reach nationally by combining with more top 200 firms.”
Last August, CRI added
In 2022, CapinCrouse acquired the
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